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RBA backs banks on funding cost claims

ELEANOR HALL: The Reserve Bank board is backing Australia's commercial banks against analysis from a French bank that accused them of fudging their excuses for raising their mortgage lending rates.

Research by Societe Generale said the recent rate hikes by commercial banks had more to do with them protecting their profit margins than higher funding costs.

But in the minutes from its February meeting, the RBA says funding costs are now significantly higher than they were in the middle of 2011.

Joining me now in the studio is our business editor Peter Ryan.

So Peter this argument is going back and forth, what did the Reserve board add to it today?

PETER RYAN: Eleanor, the Reserve Bank has repeated previous statements over the past week or so that the cost of swapping funds raised in offshore markets into Australian dollars has increased in recent months.

And the minutes say that at the same time, banks are continuing to compete for deposits, meaning that reductions in deposit rates had not fully matched the cumulative 0.5 percentage point cash rates cuts in November and December.

And so the RBA's saying that collectively, these developments had narrowed the all important difference between bank lending rates and the funding costs.

And as we know, the Reserve Bank surprised most economists a fortnight ago by leaving the cash rate on hold at 4.25 per cent. And that's because the Reserve Bank board judged the current setting to be appropriate given the way they feel about the overall economic outlook.

ELEANOR HALL: Now how does this fit with the French analysis? The analyst did say that he was using RBA data when he was looking at the commercial banks.

PETER RYAN: Well importantly the decision on the cash rate was a fortnight ago. So this revelation from Societe Generale would not have been around or available to the Reserve Bank board and it's possibly likely they may not have considered it.

But the Reserve Bank board does its own research, and has a team of staff constantly monitory global and local conditions and what they means for the cash rate

But you're right, it is a red hot argument given that major banks responded with independent increases in their standard variable rates, fuelling the anger we've been hearing from the Treasurer, Wayne Swan, borrowers and of course consumer groups.

But the RBA's defence of the higher funding cost argument counters claims by the Societe Generale banking analyst Christian Carrillo.

And he told the AM program that the banks were wrong to claim that funding costs on global markets were higher.

CHRISTIAN CARRILLO: Overall funding costs for Australian banks have absolutely come down. Research suggests that effectively pretty much every source of funding that they use - in terms of domestic deposits, short-term funding onshore, long-term funding onshore - has actually gone down.

And Peter, banks have been under fire for raising their rates independently of the RBA. Did the Reserve Bank indicate whether it is looking at a rate cut later this year?

PETER RYAN: Well they're not ruling one out. And despite keeping rates on hold this month, the RBA has held out the possibility that the cash rate could fall if the all important inflation scene continues to moderate.

And they have said if demand conditions here continue to weaken materially, the inflation outlook would provide scope for a further easing in monetary policy.

Now the Reserve Bank holds its next board meeting on 6th March and a few economists are tipping the possibility of rate cut to compensate for those independent rate hikes, though most economists think that the Reserve Bank will stay on the sidelines and wait and see.

ELEANOR HALL: And European finance ministers are still inching towards a bailout deal for Greece. Does the RBA remain concerned about Europe and the Greek situation?

PETER RYAN: Very concerned, though not as concerned as they were in November and December of last year. And they've noted that while the outlooks for world growth have been downgraded, financial market developments had been somewhat more positive over the past month or so.

The RBA says that Europe appears to be in recession but in contrast the US economy had improved in recent months with an improvement in the unemployment rate. Upbeat about Europe, despite its view that major uncertainty remains.

And as we'll hear shortly the big story is what's happening with the bailout deal in Greece, with the European finance ministers negotiating a $170 billion bailout deal. And the Reserve Bank has made the deal that they are concerned about Greece's adherence to the conditions of the rescue package, and that in recent weeks they have continued to slip.